Assets in collective investment trusts (CITs) have grown significantly in recent years, but providers will need to address certain shortcomings to maintain that growth, says a new report.
Generally priced lower than other retirement plan vehicles – such as mutual funds – costs continue to be the primary growth driver of CITs, according to the 2019 CIT provider survey by Cerulli Associates conducted in partnership with the Coalition of Collective Investment Trusts. However, broader penetration will depend upon CIT providers’ ability to address potential headwinds to growth and secure opportunities to improve advisor education, the organizations note.
Data was collected from 27 firms, representing $2.3 trillion in CIT assets (over 80% of the entire CIT market) in March, April and May of 2019, with participation including 12 of the top-15 largest CIT providers as of year-end 2018.
According to the survey data and Cerulli’s proprietary modeling, CIT assets stood at $3 trillion as of year-end 2018. The vehicle exhibited a compound annual growth rate (CAGR) of 7.25% over the five-year period ended 2018. If it wasn’t for a temporary dip in market performance at the end of 2018, the CAGR would have been even higher, the organizations observe.
With DC plans in recent years accounting for the majority of flows to CIT products, providers increasingly have been forced to question strategies for tapping the channel, the report explains.
When asked how important various considerations have been in the development and distribution of CITs, nearly all (96%) providers cited demand from DC plans as “very important,” while a similar amount (89%) cited lower costs and fees. In addition, increased demand for target-date funds and serving as an additional vehicle offering for existing investment strategies were both cited by nearly two-thirds of respondents as very important.
Ongoing Challenges
Education appears to be an ongoing issue, however. “More than 40% of CIT providers identify financial advisors’ lack of CIT knowledge as a top challenge to adoption in DC plans,” notes James Tamposi, senior analyst at Cerulli. “This highlights that one of the biggest initiatives has been to increase education and awareness of the vehicle among plan sponsors, financial advisors and other industry participants,” Tamposi says.
CIT providers also face the challenge of addressing investors’ expectations for transparency. “The lack of consistent, public reporting factors in to DC plan sponsors’ reluctance to adopt the vehicle,” observes Anna Fang, research analyst at Cerulli. “Almost half of providers surveyed noted that CITs’ lack of transparency relative to mutual funds threatens the vehicle’s adoption.”
An additional challenge to CIT adoption in DC plans, according to respondents, is that CITs require a contract, whereas mutual funds do not, with 44% citing this as a top-three challenge. Respondents also cite issues with plan sponsors and financial advisors being able to access clean and comparable data on CITs within databases.
When asked to select the degree to which various investment vehicles pose a threat to the potential growth of CIT assets, mutual fund clean shares, not surprisingly, was cited by 30% of respondents as a “significant threat,” while 67% said the vehicle poses “somewhat of a threat.” Mutual fund I-shares and institutional separate accounts were nearly even as posing the next greatest threats, the findings further show.
Consequently, Cerulli suggests that CIT providers should continue to offer advisors as much information and transparency as possible (e.g., reporting, commentary). “The industry will be pressed to educate the advisor world, dispelling any long-standing myths that are preventing otherwise valuable vehicle recommendations,” the firm observes.
These findings appear consistent with a recent NAPA Net Reader Poll, which found, among other things, that interest in CITs seems to be increasing, but greater transparency and educational efforts may help make inroads to greater adoption.
